## Facts

- Leslie Fay Companies, Inc., a publicly traded apparel company, discovered major accounting irregularities in early 1993.
- The board formed an independent Audit Committee and retained Weil, Gotshal & Manges to investigate and advise on governance and related matters.
- Public disclosure of overstated profits led lenders and suppliers to restrict credit, contributing to Leslie Fay’s Chapter 11 filing on April 5, 1993.
- Post-petition, the court authorized Weil’s retention as counsel to the debtor-in-possession while Weil continued advising the Audit Committee.
- The United States Trustee, supported by the unsecured creditors’ committee, questioned whether Weil was “disinterested” under 11 U.S.C. § 327(a) and whether Weil made complete disclosures under Fed. R. Bankr. P. 2014.
- The court appointed an examiner to investigate alleged conflicts and nondisclosures.
- The examiner reported that Weil failed to disclose connections including: (a) representation of entities whose senior employees were potential targets of the Audit Committee investigation, and (b) representation of the debtor’s outside auditor and a significant creditor.
- The examiner did not find proven, case-outcome harm to the estate from Weil’s work, but concluded the omissions were serious under the disclosure regime.

## Issues

1. Whether Weil’s undisclosed connections required disqualification under 11 U.S.C. § 327(a) because the firm was not “disinterested” and/or held or represented an interest adverse to the estate.
2. Whether Weil’s incomplete disclosures under Fed. R. Bankr. P. 2014 warranted monetary sanctions, and what remedy was appropriate.

## Decision

- The court granted the motion in part and denied it in part.
- Weil was disqualified from undertaking new matters for the debtor going forward, but was permitted to complete work already in progress.
- The court imposed economic sanctions requiring Weil to bear costs associated with the examiner’s investigation and related proceedings.

## Legal Principles

- Under 11 U.S.C. § 327(a), debtor’s counsel must be disinterested and must not hold or represent an interest adverse to the estate.
- Fed. R. Bankr. P. 2014 requires professionals seeking employment to disclose all connections with the debtor, creditors, and other parties in interest; the duty is broad and does not depend on counsel’s view of materiality.
- Failure to disclose required connections is itself a serious violation that can justify remedies independent of proof of actual harm.
- Bankruptcy courts have equitable discretion to tailor remedies for conflicts and nondisclosure, including partial disqualification and cost-shifting, while considering disruption and expense to the estate.

## Conclusion

The court treated Weil’s nondisclosures as a serious breach of the disclosure framework and responded with limited disqualification and cost-shifting sanctions, balancing enforcement of professional standards against the practical harm to the Chapter 11 reorganization that full disqualification could cause.


In re The Leslie Fay Cos., Inc., 175 B.R. 525 (Bankr. S.D.N.Y. 1994)